A mathematical approach to order book modeling

DOI10.1142/S0219024913500258MaRDI QIDQ2853371zbMATH OpenFDO

Authors Frédéric Abergel, Aymen Jedidi

Publication date 21 October 2013

Published in International Journal of Theoretical and Applied Finance (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/1010.5136

zbMATH Keywords

Markov chainFCLTlimit order bookbid-ask spreadgeometric mixingstochastic stabilityagent-based modelingorder flow

Mathematics Subject Classification ID

Applications of continuous-time Markov processes on discrete state spaces (60J28) Applications of Brownian motions and diffusion theory (population genetics, absorption problems, etc.) (60J70) Financial applications of other theories (91G80)

Abstract: Motivated by the desire to bridge the gap between the microscopic description of price formation (agent-based modeling) and the stochastic differential equations approach used classically to describe price evolution at macroscopic time scales, we present a mathematical study of the order book as a multidimensional continuous-time Markov chain and derive several mathematical results in the case of independent Poissonian arrival times. In particular, we show that the cancellation structure is an important factor ensuring the existence of a stationary distribution and the exponential convergence towards it. We also prove, by means of the functional central limit theorem (FCLT), that the rescaled-centered price process converges to a Brownian motion. We illustrate the analysis with numerical simulation and comparison against market data.

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Cited in

(41)

• Dynamic optimal execution in a mixed-market-impact Hawkes price model
• Optimal inventory management and order book modeling
• The order book as a queueing system: average depth and influence of the size of limit orders
• HYDRODYNAMIC LIMIT OF ORDER-BOOK DYNAMICS
• Inventory accumulation with multiple products
• Limits of Limit-Order Books
• Order book model with herd behavior exhibiting long-range memory
• ON BOUNCING GEOMETRIC BROWNIAN MOTIONS
• Long-time behavior of a Hawkes process-based limit order book
• Analysis of a decision model in the context of equilibrium pricing and order book pricing
• Disentangling and quantifying market participant volatility contributions
• Optimal liquidation under indirect price impact with propagator
• A mathematical framework for modeling order book dynamics
• Clearing price distributions in call auctions
• A one-level limit order book model with memory and variable spread
• Quasi-likelihood analysis for marked point processes and application to marked Hawkes processes
• Statistical inference for ergodic point processes and application to limit order book
• Scaling limit of a limit order book model via the regenerative characterization of Lévy trees
• Optimal liquidity-based trading tactics
• Rigorous results for the Stigler-Luckock model for the evolution of an order book
• Diffusive behavior and the modeling of characteristic times in limit order executions
• Modelling the shape of the limit order book
• Second order approximations for limit order books
• Semi-Markov model for market microstructure
• Optimal market dealing under constraints
• Global order routing on exchange networks
• Optimal Trade Execution Strategy and Implementation with Deterministic Market Impact Parameters
• High frequency trading and asymptotics for small risk aversion in a Markov renewal model
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• Deep learning for limit order books
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• Variable diffusion in stock market fluctuations
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• On the forward algorithm for stopping problems on continuous-time Markov chains
• Exact solution to two-body financial dealer model: revisited from the viewpoint of kinetic theory
• Ergodicity and diffusivity of Markovian order book models: a general framework

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